Old habits

There are two ways of dealing with any kind of surplus. One is to consume it; the other is to send the extra away. But whatever happens, you never ration it. But India is different.

It is not being able to consume, not entirely anyhow, its surplus of foreign exchange""although as the investment boom suggests, its appetite may be beginning to grow.

So it has been gradually sending it away in the form of liberalised rules for Indians acquiring foreign exchange to be spent as they please.

Until recently this was mostly for what our governments have regarded patronisingly as "worthy causes" such as education abroad, or disapprovingly as "pleasure" such as travel abroad.

More recently, when even liberalisations on this score failed to make a dent in the growing mountain of foreign exchange, it was decided to let Indians do the hitherto unthinkable""invest abroad.

Few people can appreciate the strain this placed on the governmental mind. But since the other alternative, inflationary pressure, was worse, it went aheadand swallowed its pride.

But it is difficult to go against the grain. So the Reserve Bank of India (RBI) is now keen to save Indians from themselves. It has told Indian banks that they can hand out up to $10 million each to people asking for dollars to invest abroad.

That this limit will take care of only around 400 clients per bank (if each customer chooses to invest his full quota of $25,000), which is like the cherry on top of a 10-kg cake, doesn't appear to have occurred to the RBI.

So if you happen to be your bank's 401st client, you will be asked to go away and come back at 00.01 hours on January 1 next year.

It is no secret that India has been inching ever so slowly towards capital account convertibility. The defence frequently heard is that it is the direction and not the speed that is all-important.

Well, now even the direction seems to be in question, since the new rule is clearly a rollback of eminently sensible reform.

If the Bank of International Settlements, which is a sort of central bankers' club, were to run a contest, the RBI will win hands down on its extreme caution.

If he wants to avoid such a denouement, the RBI governor should ask his officers to find out who is responsible for this piece of ludicrousness and take remedial action at once.

It is no one's case that there should not be a cap. But it must be a sensible one when reason exists for one, and the cap must apply to the investor, not to the intermediary in a transaction.

If anything, the continuing growth of foreign exchange reserves should be prompting the RBI to progressively remove the controls that still remain on capital movement out of India.

Quite a lot has already been done (for instance, companies are now allowed to go in for major overseas acquisitions), and many of the old restrictions on spending have been removed.

But what has not gone, quite clearly, is the old mindset that looks for safeguards and controls even when there is no logical case for these. But then, attitudinal change is the most difficult of all.